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Startup Stock Options – Why a Good Deal Has Gone Bad

678 点作者 furkansahin大约 6 年前

34 条评论

MobileVet大约 6 年前
I was part of a very well know incubator and a very early employee at a flagship company. Founder blew tons of cash and dilutions but that is part of it and I didn’t mind.<p>What was ethically shady was shortly after I left with 4yrs vested they decided to restructure the entire company so they could attract investment. They took all the debt from the original company and put that in a shell company that then owned a portion of the new company. Guess where early employees’ stock went? The debt vehicle.<p>I actually did make some money on the eventual exit, but probably 1 or 2 orders of magnitude off of what it would have been if my stock was in NewCo. Consider the tech we built was a major driver of the acquisition, it was frustrating.<p>People are greedy, no matter how nice they are to your face.
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kabdib大约 6 年前
I made a bunch of money from ISOs at large, established companies.<p>I made <i>zero</i> (well, negative, really) from startup stock options, even before things got really shifty in the 2000s. One startup that I left, that is now a billion dollar company, simply decided to &quot;extinguish&quot; the shares I bought a few years after I resigned. I was probably cheated, but it&#x27;s not worth the effort to go after them and they know it.<p>Treat startup options as wastepaper. You might get lucky, but it&#x27;s really, really unlikely.
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thesausageking大约 6 年前
He glosses over an important point: it&#x27;s now typical for founders to take money off the table as part of financing rounds, sometimes as early as the A round. Founders will request it as part of a funding round and, there&#x27;s so much competition to invest in the top startups, that VCs go along with it. Decades ago, this wasn&#x27;t the case. Founders waited for the IPO like employees.<p>If you&#x27;re an engineer sitting on $5m of vested stock in a decacorn, it makes financial sense to sell some of it. Today, companies make that really hard to do.<p>If employees could easily sell their stock while the startup is still private, this would solve a lot of the problems.
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aiisahik大约 6 年前
The article is right but misses the biggest problem with options: the need to spend money you may never get back in order to have a chance to be paid anything. There are two ways this happens:<p>- You leave the company after 4 years and have 30-90 days to exercise. The exercise will cost you $20,000. The company is nowhere near an exit. Do you do it?<p>- When you exercise you are either immediately hit with a tax bill for NSOs or you get screwed on AMT with ISOs. You suddenly owe money to the IRS simply because the company received a very high 409A valuation just before you left. A liquidity event is nowhere in sight.<p>You&#x27;ve taken a huge gamble by joining a fledgling company that pays little with a low probability of success. You toil for years an overcome tremendous odds to just keep the company alive. But now when you leave the IRS and the company itself wants you to take a final gamble with your hard earned cash.<p>I used to be an attorney who drafted option agreements. Now I&#x27;ve been at two startups as early employees. The reason why this never comes up is because employees do not know what they are getting themselves into. The options are worth very little BY DESIGN. Unless you are among the first 5 hires, you will have no leverage to negotiate a better deal.
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save_ferris大约 6 年前
Why don&#x27;t startups offer actual equity grants instead of options? It seemed strange to me when I was starting out in my career that I needed to take a lower salary and options to exercise upon my exit, which wound up costing me thousands of dollars from that lower salary.<p>Two years later, one founder forced out his two other cofounders, started a new company in the exact same space, and poached his best employees, essentially jettisoning the cap table in the process.<p>The small frys who exercised their options were totally screwed. That was a real lesson for me on how crazy this stuff can be.
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seibelj大约 6 年前
Valid reasons to work for a startup:<p>- You are a cofounder.<p>- You have little experience and you are using this to break into the industry, and get experience on many different technologies (&quot;wear many hats&quot;).<p>- They are working on a very specific problem or using a specific technology that you strongly desire to work on and it&#x27;s difficult to do it anywhere else.<p>- You want to work a certain way (remote, on the beach, whatever) and they are willing to go this route.<p>Invalid reasons for working at a startup:<p>- Getting rich off stock options.<p>- Making a lot of money in salary.<p>- Work &#x2F; life balance.<p>- Stability.
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iblaine大约 6 年前
IPOs are increasingly turning into an exercise of the Greater Fool Theory [1]. I&#x27;m not sure if it&#x27;s investors or employees who are the bigger fool. Investors can fall back on ratchets [2]. Lyft may sue a bank for helping pre-IPO investors short sell [3]. What does seem to be clear is the widening gap between smart money (investors) and dumb money (employees).<p>[1] <a href="https:&#x2F;&#x2F;en.wikipedia.org&#x2F;wiki&#x2F;Greater_fool_theory" rel="nofollow">https:&#x2F;&#x2F;en.wikipedia.org&#x2F;wiki&#x2F;Greater_fool_theory</a><p>[2] <a href="https:&#x2F;&#x2F;www.investopedia.com&#x2F;terms&#x2F;f&#x2F;fullratchet.asp" rel="nofollow">https:&#x2F;&#x2F;www.investopedia.com&#x2F;terms&#x2F;f&#x2F;fullratchet.asp</a><p>[3] <a href="https:&#x2F;&#x2F;www.cnbc.com&#x2F;2019&#x2F;04&#x2F;06&#x2F;lyft-is-threatening-litigation-against-morgan-stanley-accusing-the-firm-of-supporting-short-selling.html" rel="nofollow">https:&#x2F;&#x2F;www.cnbc.com&#x2F;2019&#x2F;04&#x2F;06&#x2F;lyft-is-threatening-litigati...</a>
btilly大约 6 年前
To his suggestions, I have another.<p>Offer internal Dutch auctions on a regular basis to provide an opportunity for investors&#x2F;the company&#x2F;etc to buy stock from employees at a reasonable price. This makes the value of the company, from the point of view of the employee, not &quot;funny money&quot; but something very tangible. With an opportunity to cash out long before it is public.
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l2c1928大约 6 年前
It&#x27;s bad for most people, but when it&#x27;s good it&#x27;s really good.<p>I was lucky to join a now unicorn as one of the first few dozen employees a few years ago. I forward exercised with a few thousand out of pocket (section 83b) an equity grant now worth around $1.5m. Because I forward exercised my options at a low valuation I didn&#x27;t have to worry about paying taxes if I exercised at a later time when the company&#x27;s valuation grew. It also meant that my gains became long-term capital gains, and thus taxed lower, as soon as possible after I vested each month.
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bitL大约 6 年前
It&#x27;s sad that VC&#x2F;founder&#x27;s greed and throwing early employees under the bus became the norm :-( I guess that&#x27;s a sign of maturity of our field and an indication for bright people to move on to take risks directly, offer their services to companies as legal persons and ignore startups as employers.
dalbasal大约 6 年前
The weird thing is that this state of affairs (a) doesn&#x27;t save investors very much dilution.<p>Meanwhile, (b) options do a much poorer job of motivating&#x2F;recruiting employees, (c) an even worse job of aligning interests and (d) the risk&#x2F;downsides aren&#x27;t reduced at all.<p>If stock &quot;values&quot; start to drop, it can really make a company feel like a sinking ship. That&#x27;s the risk of equity sharing. They can make bad times worse. This happens no matter how distant&#x2F;unlikely a liquidity event is.<p>The solution has been mentioned all over this thread: make them liquid somehow.<p>Alternatively, stop doing options and do something else instead. Aren&#x27;t startups supposed to be breaking conventions and being creative?<p>I agree this Steve B&#x27;s implication, the average stock option scheme is a vestigial artefact. Unless you&#x27;re in a position (and of a mind) to negotiate terms, it&#x27;s a checkbox.
rmrm大约 6 年前
having worked at a lot of startups with various outcomes, I&#x27;ve come to firmaly believe the net preset value of your options is actually correct. If you take all the shares I&#x27;ve ever had options given on, and multiplied them by the strike price, it isn&#x27;t far off from the ultimate amount of money they&#x27;ve been worth. The variance is high between each one, but taken together..<p>If you get a 100,000 shares at 0.10 each...they are likely over multiple trials going to be worth around 10K. Act accordingly.
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gwbas1c大约 6 年前
I joined a company where my offer letter had two salary options: A higher salary with less stock, or a lower salary with higher stock. (It wasn&#x27;t a very large difference.)<p>About a year later, we were sold, and the payout from the stock did not justify the salary difference. In order to justify the difference, the payout needed to be about 20x.<p>When I confronted the CEO she just changed the subject, and didn&#x27;t understand why I stopped keeping it a secret that I was looking for another job.
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markbnj大约 6 年前
&gt; As Venture Capital emerged as an industry in the mid 1970’s, investors in venture-funded startups began to give stock options to all their employees.<p>I don&#x27;t understand this part of the post. When do &quot;investors&quot; grant stock options? When I did a startup back in the 90&#x27;s the founders owned all the equity the day after the company was incorporated and a stockholder agreement signed specifying what each of us owned. We then sold equity to angel and venture investors by carving out a piece of the common in the former case, and issuing new preferred shares in the latter. Later the company granted ISOs to employees by an act of management, ratified by the board which did of course include investors. But at no time would I have said that the investors &quot;shared their ownership&quot; with employees. All current owners were diluted by the issuance of new shares or rights to new shares, but it was never a flat-out decision by the investors to share what they owned. It was a management decision.
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gumby大约 6 年前
A super trivial and tangental point but Fairchild was funded to make discrete semiconductors -- specifically transistors. In those days they were all assembled by hand! The chip (IC) was invented a year or so later.
brownkonas大约 6 年前
I think another correction to the diminishing value of stock options and longer IPO horizon is that insane hours are less common now, even at the peril of the success of the median startup. It&#x27;s also a result of the tight tech labor market and the wealth divide between new startup comp and FAANG comp. Why should I would disproportionate hours if there&#x27;s another job with a more certain outcome that does not require this.<p>Curious if others have seen a drop in hours expected from your average startup (separate discussion if longer hours is a key ingredient and overall a good thing).
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jpmattia大约 6 年前
I think an important point was missed: Steve writes:<p>&gt; <i>The first big idea is that unlike in the 20th century when there were two phases of funding startups–Seed capital and Venture capital–today there is a new, third phase. It’s called Growth capital.</i><p>It used to be that The Public would provide the &quot;Growth capital&quot; via an IPO; Now the public is providing, I suppose, post-Growth capital via the IPO. In an current era where the market believes P&#x2F;E ratios of 24 make sense [1], that has so far been viable.<p>If more historically normal valuations return to public companies, or if the latest crop of unicorns fail to provide great returns for the IPO investors, I strongly suspect this new division of funding phases will come to an end.<p>[1] <a href="https:&#x2F;&#x2F;www.macrotrends.net&#x2F;2577&#x2F;sp-500-pe-ratio-price-to-earnings-chart" rel="nofollow">https:&#x2F;&#x2F;www.macrotrends.net&#x2F;2577&#x2F;sp-500-pe-ratio-price-to-ea...</a>
JohnFen大约 6 年前
I&#x27;ve never really considered stock options to be a good deal, really. There&#x27;s a reason they&#x27;re widely referred to as &quot;wallpaper&quot;.<p>Options are a bit like lottery tickets. All other things being equal, it&#x27;s marginally better to have them than not, but their existence has never affected my decisions about where to work.
jordanwlong大约 6 年前
Check out the Employee Stock Option Fund (www.esofund.com), we help employees fund the cost of exercise and any taxes. Our funding is on a non-recourse basis so we can help alleviate any risk (especially given the long time to exit that is mentioned here).
shay_ker大约 6 年前
&gt; Better yet, offer restricted stock units (RSUs). Restricted Stock Units are a company’s promise to give you shares of the company’s stock<p>Do startups commonly offer RSUs? I suppose my follow-up is whether it&#x27;s easy to do, using Carta or something similar.
thebyrd大约 6 年前
I&#x27;ve made money on my ISOs at every startup I was an early employee of. The secondary markets are fairly liquid if you know how to navigate them. None of the companies were in the Bay Area either.
geggam大约 6 年前
From my experience most startup stock are common so they dont get paid until the preferred get settled up.<p>You can have 20k shares of stock and walk away with nothing even in an a successful IPO
olliej大约 6 年前
This is exactly the point I have been making: the equity grant structure for startup employees is not (or no longer?) compensates risk for employees
m0zg大约 6 年前
It never was a &quot;good deal&quot;, it was always a lottery. And one that you&#x27;re set up to lose if you&#x27;re not a co-founder.
dgudkov大约 6 年前
&gt;VC’s typically have pro-rata rights to keep their percentage of ownership intact, but employees don’t<p>Either all shares must be diluted, or none. When someone&#x27;s shares are diluted but someone&#x27;s not, it&#x27;s a scam. The concept of privileged shareholders is just wrong.<p>The whole system looks overly complicated and corrupted.
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habosa大约 6 年前
There are so many absolutely horrifying stories in this thread about startups deliberately restructuring to take money away from rank and file employees. Of all the reasons I&#x27;ve been told not to take startup stock, this one is new to me.<p>What can be done about this? At the very least can we name and shame?
matchagaucho大约 6 年前
Sure companies are worth more in 10-12 years. But when VCs are managing 7 year funds, their LPs may require returns sooner.<p>I&#x27;m surprised this article didn&#x27;t mention Investors ability to simply hold shares post-IPO. Leave it to the LP pension managers to decide how much upside they want to risk.
dustingetz大约 6 年前
If options are busted how should a startup compensate and align employees?
pmarreck大约 6 年前
I feel like you almost need a business degree as a work-seeking technologist to understand all the financial structures and future implications at play, here
fisherjeff大约 6 年前
IMO, startup options should be treated like lottery tickets: some people might win big, but the EV is ~0.<p>Negotiate compensation accordingly.
naveen99大约 6 年前
Other employees can liquidate shares in the secondary market too, fairly easily.
jiveturkey大约 6 年前
this is a contorted, misguided, wrong argument. as evidenced by the lack of a proposed solution.<p>i could refute his arguments point-by-point but i&#x27;ll just highlight a few.<p>1. in a couple of places, he notes that &quot;employees&quot; put in as much hard work as &quot;founders&quot; but don&#x27;t receive equivalent compensation. this is an absurd comparison. the amount of hard work is irrelevant, it&#x27;s the value you bring to the table. part of that value is via hard work, and part is via the unique (or not) skill set. the unskilled janitor or maintenance man might put in hard work, but is an easily replaceable skill. if in fact you think you are bringing as much value as the founders, but aren&#x27;t getting rewarded, the solution is very, very, <i>very</i> simple: become a founder.<p>2. <i>So while the VCs gain the upside from keeping a startup private, employees get the downside.</i> What? Given the very well known, no excuses for not knowing this, fact that the large majority of startups fail, VCs take 100% of the risk, by virtue of laying out 100% of the capital. The employees get a salary during this time (no &quot;downside&quot;), and any upside is <i>free money</i> to them. Now this isn&#x27;t a perfect rebuttal, but steve&#x27;s argument is also lacking in nuance so i&#x27;ll leave it there.<p>3. <i>VCs have moved the liquidity goal posts _but_ haven&#x27;t moved the vesting goal posts.</i> Is he suggesting the vesting schedule needs to be <i>longer</i>?? To match liquidity??? this is nonsensical.<p>the overriding problem, he suggests, is this new &quot;growth capital&quot; phase. i don&#x27;t agree this has made the stock option deal &quot;bad&quot;. yes, it changes the nature of it, but not to as negative a degree as he implies. if he wants companies to IPO earlier, well what happens is that your 1 basis point of options will be worth 10x less than if you stick it out. it&#x27;s like people complaining about dilution: dilution isn&#x27;t a problem ... your net cash value increases with each round. it&#x27;s not really feasible to have the hoi polloi be able to liquidate options at each round.
dman大约 6 年前
Thank you for writing this! This discussion is long overdue.
mlthoughts2018大约 6 年前
It’s not just that the structure of option grants has worsened (also, expiration practices still are pretty bad for employees), but also that the valuation of the option grants is often way too low.<p>If, as in the article, a start-up is effectively offering a low salary + a lottery ticket and expecting candidates to see it as at least equally as valuable as a high total comp figure from a competitor, then the lottery ticket has to be priced very highly, to drag up the expected value after accounting for all the high likelihood outcomes that have poor payoffs.<p>Add to this the fact that, despite false promises, you won’t get more freedom, career opportunities, cutting edge work, etc., at most start-ups than you would at even average-case public companies, and it’s a bleak picture. No aspects of the work experience will create additional forms of “payoff” that help offset the low salary and poor lottery ticket equity, and in many cases the work environment will be toxic, full of immature behavior, unprofessional, etc., and candidates should really be requiring <i>higher</i> compensation than at a big company, to deal with the start-up dysfunction.<p>When the option valuation (even assuming a hilariously unlikely high value exit or IPO) is eventually diluted and spread out across ~10 years that you have to delay getting that money you earned (or even lose it all because of a layoff + poor expiration policy), and at best it turns out to be the annualized equivalent of a pretty modest bonus, it’s just deeply not worth it.<p>You will not have gotten anything else out of it (specialized experience, leadership or business skills, networking, oddball perks) that offsets the income you could have been earning almost anywhere else.
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